Restrictions on Receiving Cash

Restrictions on Receiving Cash in a 1031 Exchange

It is important to understand the limitations that the IRS has put in place. The 1031 code limits a taxpayer’s right to “receive, pledge, borrow or otherwise obtain the benefits of the funds…held by an intermediary”.

Once the taxpayer’s sale closes and Security 1st Exchange has received the exchange funds, these rules permit us to utilize the funds only to acquire replacement property. But when can we release funds to the taxpayer that were not utilized for the purchase?

  • If no properties are identified with the Qualified Intermediary within the 45 day identification period, the QI can release the funds to the taxpayer on day 46.

  • If the taxpayer has identified replacement property within the 45 day identification period, the taxpayer may receive the funds either after (a) the date where the taxpayer has acquired all replacement properties identified, or (b) the end of the 180 day exchange period. Please note that if a taxpayer identifies multiple properties but does not acquire all of them, the QI must retain the funds until after the 180 day exchange period expires.

  • If a material and substantial contingency occurs that relates to the exchange is provided for in writing and is beyond the control of the taxpayer and any disqualified person other than the seller, then the funds may be delivered to the taxpayer before the expiration of the 180 day exchange period. Examples of a material and substantial contingency may be if the property is destroyed by natural disaster, or if clear title cannot be transferred to the taxpayer from the seller.

For more information, U.S. Treasury Regulation, Section 1.1031 (k)-1(g)(6) defines the restrictions placed on a Qualified Intermediary in situations like this. For more information, please reach out to your tax professional for specific questions or contact the specialists here at Security 1st Exchange for assistance.